April 26, 2019
I’m just asking because that’s what the Washington Post told readers in an article on the 2019 Social Security and Medicare Trustees reports. The piece noted that the Medicare program is first projected to face a shortfall in 2026. It would take an increase in the payroll tax of 0.91 percentage points (0.455 percentage points on both employees and employers) to fill the projected gap. The piece tells readers this is “a measure that could hurt business development and growth.”
It’s not clear why it would have such a negative effect on business development and growth. The conventional view in economics is that the worker pays this tax out of their wages, so essentially it means that after-wages will be 0.91 percent lower with the tax increase. While that will moderately reduce the incentive to work, most studies show this should have little effect on employment.
We have seen much larger tax increases in prior decades, for example the payroll tax rose by 4.8 percentage points from 1959 to 1969, with little obvious negative effect. It is also worth noting that the slower pace of health care cost growth over the last decade has slowed or even reversed the rise in the percentage of compensation going to health insurance. This means that wages have risen more rapidly than if health care costs had continued to grow at their prior pace. In its impact on the labor market this is equivalent to a cut in the payroll tax. The impact of this slower health care growth over the last decade has been considerably larger than the 0.91 tax increase that is projected to be necessary to fund Medicare after 2026.
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